Home Depot tries to get back to basics

Home Depot continues to attract comment for its strategic decisions. Is it retreating to a low-risk low growth position?

Home Depot has had a tough few years. Its management was criticized for its lack of progress under Bob Nardelli. It was criticised for paying Nardelli too much while he was there, and too much when he left. The sale of its contractor supply business to private equity has been renegotiated downwards during difficult financial market conditions.

Now the strategy itself is criticised, according to a Newsweek report. It seems that

The really important question about the sale of Home Depot’s construction supply business isn’t the price, which Home Depot lowered 18% on Aug. 28, to $8.5 billion, after round-the-clock negotiations. The real issue is whether the unit should be sold at all. Some upset investors argue that by selling HD Supply, which serves contractors rather than do-it-yourselfers, Home Depot’s new management is dumping its best hope for future growth simply to finance a stock buyback and exorcise the ghost of ex-Chief Executive Robert Nardelli, who masterminded the purchase

A Strategic Dilemma

This is the sort of strategic dilemma taught through cases at Business Schools. The cases are intended to demonstrate how students should think about complex business issues, rather than to supply best-practice silver-bullet answers.

Home Depot faces a well-known dilemma. It has long passed a growth phase when its stock was rising in sensational fashion. Efforts to maintain the growth led to a decision to bring in new and dynamic management. When the desired growth was not achieved, the leader was deposed. Nardelli’s demise was made easier by his management style and a skill at extracting extremely favourable personal rewards. It should be noted that this might suggest he was a difficult boss, but not a stupid one. He has since found further and gainful employment elsewhere. His strategy for Home Depot was to find growth for the business.

But continued lack of growth made it harder for the company to finance change. Nardelli’s plan for the future included growth from the side of the business selling to contractors. This remains a high-potential but therefore risky option.

Here’s the dilemma. The market is outside the experience range of the company. There will be need for considerable learning. (Remember those old graphs of new markets/new products?). It may well require new management. Ah, there’s the rub. Home Depot is not exactly over-burdened with leadership talent. But it may well flinch from even more bloodletting.

It seems a signal that the company is settling for stability over a more risky growth strategy. Not exciting, but by no means a stupid strategy.

Home Depot needs more improvements

Home Depot is known as the largest home improvement firm in the world. High-flyer Bob Nardelli failed to sustain its early growth, and was fired. Six months on, his successor Frank Blake is also struggling in a tough market place. We look back at the board room battles that have beset the company

Financial warning signs are looming for Home Improvements giant Home Depot. Market conditions are tough even for a one-time glamour stock. Time was, when the company was outperforming Walmart. But then the company growth slowed.

AS USA Today put it in January, Home Depot boots CEO Nardelli.

According to Business Week,

the Board did not want to sack their CEO, neither did he want to go. In the end it came down to the headstrong CEO’s refusal to accept even a symbolic reduction in his stock package. Home Depot Inc.’s board of directors wanted their controversial chief executive, Robert L. Nardelli, to amend his whopping compensation deals for recent years. After he pulled down $38.1 million from his last yearly contract, angry investors were promising an ugly fight at the company’s annual meeting in May.

How Bob was recruited

Nardelli was recruited in 2002 after building a reputation of a high flyer under the legendary Jack Welsh at GE. But Welsh could not promise his ambitious executive the preferment he craved. A director of both GE and Home Depot had secured his services for Home Depot, whose board removed the company’s co-founder. A Fortune article at the time of his appointment offered a picture of a determined and driven character, and a battler. He had wanted to become a pro footballer but was rejected as being too small. He wanted to be chief of GE but was passed over.

Enter Frank Blake

Frank Blake was appointed chairman and CEO of Home Depot in January 2007. Prior to this position, he served as vice chairman of the board of directors and executive vice president of the company. He joined The Home Depot in 2002 as executive vice president, Business Development and Corporate Operations, and was responsible for real estate, store construction, credit services, strategic business development, growth initiatives, call centers and the Home Services business.

Frank did not have a great leadership honeymoon. Progress remained unimpressive. This was not for want of leadership initiative. Recently he was praised for bringing in the expertise of the founders:

Baboons drive the dethroned alpha male out of the pack. Eskimos set their elders adrift on ice floes. And so it goes with departing CEOs, who are often shown the door as part of the new regime’s assertion of power. In 2000, Bob Nardelli was named CEO, replacing Arthur Blank; within the next two years, Blank and co-founder Bernie Marcus gave up their remaining ties to the company.

“No one ever called or asked us our advice,” Marcus recently told Fortune. As a result, Blank and Marcus became outsiders at their own company – until January, when Nardelli stepped down amid charges of bloated compensation. The board tapped executive vice president Frank Blake to take charge, and on his first day in the job, Blake called back the founders.
Experts suggest Blake is the exception rather than the rule when it comes to recognizing the value in retired brass. “They’re an incredible resource,” says Jeff Sonnenfeld, senior associate dean at the Yale School of Management. “They know where the bodies are buried.”
The risk, of course, is that the old team hangs around too much. Blank and Marcus try to keep their distance. Blake says the founders have struck the right balance: “They’re responsive, but not intrusive.”

Happy ever after?

Leadership is not that simple. Blake has a participative style that increasingly wins support from Business gurus. It fits nicely, for example, with the Sloan leadership model. This model reminds us that no leader is perfect, and it is a strength not a weakness to acknowledge that. On the other hand, shareholders invest for returns, not leadership theories. Home Depot may now have enlightened leadership. Will it achieve improved results before another leader departs, this time with a less generous golden goodbye?